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Tax-Loss Harvesting

Strategic techniques to minimize your crypto tax burden by offsetting gains with losses

What is Tax-Loss Harvesting?

Tax-loss harvesting is a strategy where you strategically sell cryptocurrency assets at a loss to offset capital gains from other investments. This can significantly reduce your overall tax liability while maintaining your investment position.

Unlike traditional securities, cryptocurrencies currently aren't subject to the wash sale rule in most jurisdictions, making tax-loss harvesting particularly effective for crypto investors. However, this may change with future legislation.

How Tax-Loss Harvesting Works

Step 1: Identify Losses

Review your portfolio to find cryptocurrencies trading below your purchase price. These unrealized losses can be "harvested" by selling the assets.

Example: You bought 1 ETH at $3,000, now worth $2,000 = $1,000 unrealized loss
Step 2: Sell at a Loss

Execute the sale to realize the capital loss. This loss can now be used to offset capital gains from other crypto or investment sales during the same tax year.

Result: Selling the ETH realizes a $1,000 capital loss for tax purposes
Step 3: Offset Gains

Use the realized loss to offset capital gains from profitable trades. Losses first offset gains of the same type (short-term or long-term), then can offset the other type.

Benefit: $1,000 loss offsets $1,000 in gains, reducing taxable income
Step 4: Repurchase (Optional)

Since crypto isn't currently subject to wash sale rules, you can immediately repurchase the same asset to maintain your position while still claiming the tax loss.

Strategy: Buy back ETH immediately at $2,000 to maintain exposure

Advanced Tax-Loss Harvesting Strategies

Practical Example: Tax Savings Calculation

Scenario:

  • • You sold Bitcoin for a $50,000 short-term capital gain (taxed at 35% ordinary income rate)
  • • You have Ethereum with a $20,000 unrealized loss
  • • You sell the Ethereum to harvest the loss

Without Tax-Loss Harvesting:

  • • Taxable gain: $50,000
  • • Tax owed (35%): $17,500

With Tax-Loss Harvesting:

  • • Capital gain: $50,000
  • • Capital loss: -$20,000
  • • Net taxable gain: $30,000
  • • Tax owed (35%): $10,500
  • Tax savings: $7,000

By harvesting the $20,000 loss, you save $7,000 in taxes while potentially repurchasing the Ethereum immediately to maintain your position.

Risks and Considerations
  • Market Risk: If you wait to repurchase, the price may increase, causing you to miss gains
  • Transaction Costs: Frequent trading incurs fees and spreads that may offset tax benefits
  • Regulatory Changes: Wash sale rules may be extended to crypto in the future
  • Record Keeping: Requires meticulous tracking of all transactions and cost basis
  • Complexity: Frequent harvesting can complicate tax reporting and increase preparation costs
Tax-Loss Harvesting Best Practices
  • Automate tracking: Use crypto tax software to monitor unrealized losses and identify harvesting opportunities
  • Set thresholds: Only harvest losses above a certain amount to justify transaction costs
  • Consider holding periods: Be aware of short-term vs. long-term classification when harvesting
  • Document everything: Keep detailed records of all sales, repurchases, and tax calculations
  • Consult professionals: Work with a tax advisor to optimize your strategy and ensure compliance

Related Topics

Crypto Tax Basics
Fundamental concepts of crypto taxation
Reporting Requirements
Tax forms and filing obligations
Risk Management
Protect your crypto investments
Dollar-Cost Averaging
Systematic investment strategy